Q2 2024 Alexander's Inc Earnings Call
Good morning, and welcome to the Vornado Realty Trust's second quarter 2024 earnings call. My name is Rocco, and I will be your operator for today's call.
Operator: Trust, second quarter 2024. Our names are called. My name is Rocco, and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question and answer session. At that time, please press stars and 1 on your touch-tone phone. I will now turn the call over to Mr. Steve Borenstein.
This call is being recorded for replay purposes.
All lines are in a listen-only mode.
Our speakers will address your questions at the end of the presentation during the question and answer session. At that time, please press star, then one on your touch-tone phone.
Steven Borenstein: I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporate Counsel. Please go ahead. Welcome to Vernado Realty Trust's second quarter earnings call. Yesterday afternoon, we issued our second quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission.
Steve Borenstein: Welcome to Vernado Realty Trust's second quarter earnings call. Yesterday afternoon, we issued our second quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information packages, are available on our website www.vno.com under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q, and financial supplement.
Speaker Change: These documents, as well as our supplemental financial information packages, are available on our website, www.vno.com, under the Investor Relations section.
Speaker Change: In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q , and financial supplement.
Steve Borenstein: Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2023. For more information regarding these risks and uncertainties, the call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements.
Speaker Change: Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors.
Speaker Change: Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2023, for more information regarding these risks and uncertainties.
Speaker Change: The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements.
Steve Borenstein: On the call today from management for our opening comments are Stephen Roth, Chairman and Chief Executive Officer, and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Stephen Roth. Thank you.
Speaker Change: On the call today from management for our opening comments are Stephen Roth, Chairman and Chief Executive Officer, and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Stephen Roth. Thank you, Steve, and good morning, everyone.
Stephen Roth: Thank you, Steve, and good morning, everyone. Our business is on plan and continuing to improve month by month. Our primary focus is always on leasing, and I can report that N2 is extremely active. And further, that in the overall portfolio, more than two-thirds of the recent vacancies have already been spoken for.
Steven Roth: Our business is on plan and continuing to improve month by month.
Steven Roth: Our primary focus is always on leasing and I can report that PEN2 is extremely active.
Steven Roth: and further that in the overall portfolio more than two-thirds of the recent vacancies have already been spoken for.
Stephen Roth: Our focus continues to be on enhancing our liquidity, reducing leverage, and, of course, taking advantage of opportunities created by the current market dislocation. New York City is as crowded as ever, and that's a good thing. As I predicted over the past couple of years, working at the kitchen table wasn't an existential threat.
Speaker Change: Our focus continues to be on enhancing our liquidity, reducing leverage, and of course, taking advantage of opportunities created by the current market dislocation.
Speaker Change: New York City is as crowded as ever and that's a good thing. As I predicted over the past couple of years, working at the kitchen table wasn't an existential threat.
Stephen Roth: We're now seeing building utilization percentages in the 70s, and that's just about normal. Tenants are expanding and growing and actively searching for space. We actually compete in a market of over 200 million square feet, and in many of the prime submarkets, good space is being eaten up, and rents are rising. It may be that the most important dynamic in our market is that it is almost economically impossible to build new, thereby cutting off new supplies.
Speaker Change: We're now seeing building utilization percentages in the 70s, and that's just about normal. Tenants are expanding and growing and actively searching for space.
Speaker Change: We actually compete in a market of over 200 million square feet and in many of the prime sub-markets good space is being eaten up and rents are rising.
Speaker Change: It may be that the most important dynamic in our market is that it is almost economically impossible to build new, thereby cutting off new supply.
Stephen Roth: There hasn't been a new office building of size started in New York in the last five years. If history is a guide, when supply shuts down, it quickly leads to a landlord's market. As Michael will cover in a moment, we are off to a very strong start in our leasing this year. The Bloomberg renewal and extension of their 947,000 square feet at 731 Lexington Avenue, creating 16 years of term, is the highlight.
Speaker Change: There hasn't been a new office building of size started in New York in the last five years. If history is a guide, when supply shuts down, it quickly leads to a landlord's market.
Speaker Change: As Michael will cover in a moment, we are off to a very strong start in our leasing this year. The Bloomberg renewal and extension of their 947,000 square feet at 731 Lexington Avenue, creating 16 years of term, is the highlight.
Stephen Roth: And we have good activity at all of our assets. As I said, at PENTU, with the lobbies, common spaces, amenities, and plazas now complete, we're seeing a significant uptick in tour activity, and our pipeline at PENTU is strong. Prospective tenants are really appreciating our transformation, and The Penn is really an extension of the new west side from Hudson Yards to Manhattan West to Penn Station. The public space surrounding PEN1 and PEN2 is transformational, and I encourage all of you to go out and check it out.
Speaker Change: And we have good activity at all of our assets. As I said, at Pinto with the lobbies, common spaces, amenities, and plazas now complete.
Speaker Change: We're seeing a significant uptick in tour activity and our pipeline at Penn is strong. Prospective tenants are really appreciating our transformation.
Speaker Change: And the Penn is really an extension of the New West Side from Hudson Yards to Manhattan West to Penn.
Speaker Change: The public space surrounding PEN1 and PEN2 is transformational, and I encourage all of you to go out and check it out. The district is really bustling with our new food and beverage offerings.
Stephen Roth: The district is really bustling with our new food and beverage offerings. We are, we could not be more optimistic. I mentioned on the last call that we've been working on several large monetization transactions. We announced the first one yesterday, the sale of our portion of Uniqlo's Fifth Avenue flagship to Uniqlo for $350 million. This asset is in our retail joint venture, 52% of which is owned by us.
Speaker Change: We are, we could not be more optimistic.
Speaker Change: I mentioned on the last call that we've been working on several large monetization transactions.
Stephen Roth: Uniqlo is also acquiring the upper two floors of their store from the office owner. This transaction continues the theme of Fifth Avenue users purchasing their space. Unicor's lease was set to expire in April 2026, and perpetuating their control of this high volume, prominent Fifth Avenue store was paramount to the tennis. My bet is this won't be the last user purchase on Fifth Avenue. As you will recall, we recapitalized this asset at a 4.5% cap rate as part of our street retail joint venture in 2019. The sale to Uniqlo is at a 4.2% cap rate on in-place NOI, and the cap rate on the mark-to-market rent is in the mid-to-high 3% range.
Speaker Change: We announced the first one yesterday, the sale of our portion of Uniqlo's Fifth Avenue flagship to Uniqlo for $350 million.
Speaker Change: This asset is in our retail joint venture, 52% of which is owned by us.
Speaker Change: Uniqlo is also acquiring the upper two floors of their store from the office owner.
Stephen Roth: The sale is expected to close in the first quarter of 2025. Importantly, all net proceeds will go towards repaying our preferred equity on this asset. There are a few other transactions in our pipeline to repatriate portions of the remaining 1.5 billion of preferred equity, all of which will substantially increase our liquidity. The second transaction I'll quickly comment on, which has been rumored in the market, relates to 770 Broadway. We have reached a handshake deal with a user for a long-term master lease of the entire 1.1 million square foot office component.
Stephen Roth: We will retain the 92,000 square foot Wegmans market. After a difficult four or so years, market dynamics are now reversing and growing constructively. There is no new supply on the horizon, and tenants are growing and expanding and searching for space.
Speaker Change: We will retain the 92,000 square foot Wegmans market.
Stephen Roth: And importantly, New York continues to be the single best market in the nation. Worried about the elephant in the room? The activity in the government bond and stock markets over the last three days is confirmation that the Federal Reserve's fight against inflation has succeeded and likely foretells a significant reversal of interest rates. All this will have a significant positive impact on our numbers and our values. Now, over to Michael to cover our financials and the market.
Michael Franco: Thank you Steve and good morning everyone. Our overall second quarter FFO was 76 cents per share. This included 19 cents of non-comparable items, mostly our share of the gain from the discounted debt extinguishment related to the refinancing at 280 Park Avenue and gains from an additional 220 Central Park South units. Second quarter comparable FFO as adjusted was $0.57 per share compared to $0.72 per share for last year's second quarter
Michael Franco: This decrease was attributable to the known items we previously discussed and consisted of 7% of lower NOI from known move-outs, net of rent commended. $0.07 of termination income in 2023 from a former tenant at 345 Montgomery Street in San Francisco and $0.03 of higher net interest expense partially offset by $0.02 of higher NOI from signage and the net impact of other items. We have provided a quarter-over-quarter bridge in our earnings release and in our financial supplement.
Michael Franco: On our last earnings call, we stated that we expect our 2024 comparable FFO to be down from 2023 comparable FFO of $2.61 per share, primarily due to higher projected net interest expense of about $0.30 per share and the temporary impact of known vacancies at certain of our properties, primarily at 1290 Avenue of the Americas, 770 Broadway, and 280 Park Avenue of roughly $0.25 to $0.30 per share. This is still a good assumption, as these items are expected to have a larger impact during the second half.
Speaker Change: On our last earnings call, we stated that we expect our 2024 comparable FFO to be down from 2023 comparable FFO of $2.61 per share, primarily due to higher projected net interest expense of about $0.30 per share and the temporary impact of known vacancies
Speaker Change: at certain of our properties primarily at 1290 Avenue of the Americas, 770 Broadway, and 280 Park Avenue of roughly 25 to 30 cents per share.
Speaker Change: This is still a good assumption, as these items are expected to have a larger impact during the second half of the year.
Michael Franco: We already have commitments for about two-thirds of the aforementioned vacant space, assuming the 770 Broadway transaction is final, but the gap earnings from these leases won't begin until the latter part of 2022. Thereafter, we expect earnings to increase as income in the lease-up of Penn and other vacancies comes online, and as rates trend down, partially offset by the reduction of capitalized, Now at Arningville Leasing. The overall tone of the New York office leasing market continues to be upbeat as we enter the second half of the year, particularly in the mid-terms.
Speaker Change: We already have commitments for about two-thirds of the aforementioned vacant space, assuming the 770 Broadway transaction is finalized.
Speaker Change: But the gap earnings from these leases won't begin until the latter part of 2025.
Speaker Change: Now turning to the leasing markets.
Speaker Change: The overall tone of the New York office leasing market continues to be upbeat as we enter the second half of the year, particularly in Midtown.
Michael Franco: Private sector employment has reached a historic high, reinforcing that New York remains the leading magnet for talent in the U.S. Tenant demand for Class A properties is strong, outpacing 2023, and the mix of leasing is well balanced between financial services, legal, and technology. Given the lack of available quality blocks of space in Midtown Manhattan, a dearth of new supply for the foreseeable future, slowing sub-lease additions, and office conversions gaining momentum, many industry analysts are predicting a tightening of vacancy rates across the city and well-capitalized Class A properties as we head into the second half of 2024 and into 2025.
Speaker Change: Private sector employment has reached a historic high, reinforcing that New York remains the leading magnet for talent in the U.S.
Speaker Change: Given the lack of available quality blocks of space in Midtown Manhattan.
Speaker Change: A dearth of new supply for the foreseeable future.
Speaker Change: Slowing sublease additions and office conversions gaining momentum, many industry analysts are predicting a tightening of vacancy rates across the city in well-capitalized Class A properties as we head into the second half of 2024 and into 2025.
Michael Franco: A spike in rental rates, much like what we have seen on Park Avenue, and the New West Side should naturally follow. All this bodes well for Borneto's best-in-class collection of high-quality, repositioned assets within New York's most coveted submarkets on the New West Side, Park Avenue, and Sixth. Our 2024 leasing activity reinforces that tenant demand for top of the market properties near transit, and which provide the type of space and amenities companies desire for employee retention, recruitment, and flexibility, remains strong.
Speaker Change: A spike in rental rates, much like what we have seen on Park Avenue and the New West Side, should naturally follow.
Speaker Change: Our 2024 leasing activity reinforces that tenant demand for top-of-market properties near transit and which provide the type of space and amenities companies desire for employee retention, recruitment, and flexibility remain strong.
Michael Franco: During the first two quarters, we leased a total of 1.6 million square feet, a market-leading average rent of $130 per square foot. This includes our second quarter lease renewal of Bloomberg for the global headquarters at 731 Lexington Avenue, where they will continue to occupy all 947,000 square feet of office space.
Speaker Change: This includes our second quarter lease renewal of Bloomberg for the global headquarters at 731 Lexington Avenue where they will continue to occupy all 947,000 square feet of office space in the building.
Michael Franco: Excluding the Bloomberg renewal, our transaction volume for the first half of 2024 is 666,000 square feet at a starting rent of $95 per square foot, with a cash mark to market of $9.1. During the second quarter, we completed many important leases throughout the portfolio, including 11 leases at Penn One, totaling 123,000 square feet and an average starting rent of $95 per square foot. The transformation of PEN1, with its unmatched amenity program, continues to attract tenants from all industry sectors who were previously occupying space in other city submarkets and at rents above our original endowment.
Speaker Change: The transformation of Pen1 with its unmatched amenity program continues to attract tenants from all industry sectors who were previously occupying space in other city sub-markets and at rents above our original underwriting.
Michael Franco: We continue to attract leading financial services companies to 280 Park, where this quarter we completed a long-term transaction with Elliott Management for 149,000 square feet in the base of the building. The addition of Elliott to our tenant roster, where they joined PJT Partners, GIC, Terry's, and Investcorp, cemented E-Park as one of Manhattan's premier financial services properties.
Speaker Change: The addition of Elliott to our tenant roster, where they joined PJT Partners, GIC, and Terry's and Investcorp, cemented Tooey Park as one of Manhattan's premier financial services properties.
Michael Franco: Importantly, we now have at least 225,000 square feet of space at 280 during 2024 at an average starting rent of $124. Looking forward, our pipeline is roughly 2.6 million square feet, which consists of 1.6 million square feet of leases and negotiation, and well more than 1 million square feet in some stage of proposal. The pipeline consists of substantial activity at Pen 2, where we have seen a significant pickup in tenant tour activity and proposals during the second quarter following the recent completion of the project, the opening of our new pedestrian park at Plaza 33, and completion of our expansive district-wide new sidewalk.
Speaker Change: Importantly, we have now leased 225,000 square feet of space at 280 during 2024 at an average starting rent of $124 per square foot.
Speaker Change: Looking forward, our pipeline is roughly 2.6 million square feet, which consists of 1.6 million feet of leases and negotiation, and well more than 1 million square feet in some stage of proposal negotiation.
Speaker Change: The pipeline consists of substantial activity at Pen 2, where we have seen a significant pickup and tenant tour activity and proposals during the second quarter, following the recent completion of the project, the opening of our new pedestrian park at Plaza 33, and completion of our expansive district-wide new sidewalk program.
Michael Franco: Our total pipeline of deals is a 50-50 mix of new tenant deals, buying for our current vacancies, and important renewals as we continue to work hand-in-hand with our tenants expiring during the next few years in San Francisco at 555 California Street. We completed a 10-year lease renewal with Jones Bay for 62,000 square feet and are currently finalizing a 46,000 square foot renewal expansion with one of our leading financial services tenants in the building.
Speaker Change: Our total pipeline of deals is a 50-50 mix of new tenant deals, buying for our current vacancies, and important renewals as we continue to work hand-in-hand with our tenants expiring during the next few years.
Speaker Change: We completed a 10-year lease renewal with Jones Bay for 62,000 square feet and are currently finalizing a 46,000 square foot renewal expansion with one of our leading financial services tenants in the building.
Speaker Change: Additionally, we are in late stage letters of intent where several of our major tenants comprising a total of 250,000 square feet with upcoming lease expirations in 2025 and 2026.
Michael Franco: Additionally, we are in late stage letters of intent, where several of our major tenants comprise a total of 250,000 square feet with upcoming lease expirations in 2025 and 2026. All these deals have positive mark to markets on the ranch, reflecting 555 troping.
Speaker Change: All these deals have positive mark-to-markets on the ranch, reflecting 555's trophy nature.
Operator: Finally, in Chicago at the Mart, we completed a long-term expansion and renewal lease in July with one of our major tenants, which tripled in size to 160,000 square feet. Although the Chicago market is challenging, we are benefiting significantly from the quality of our asset, with our market-leading work-life amenity program and rock solid spine, and other strong players. Turning to the capital market, while the financing markets remain challenging for office and banks remain out of the market, we are beginning to see some early signs of improvement with the CMBS market open again for selective high-quality assets and even ones that are less.
Speaker Change: Finally, in Chicago at the MARD, we completed a long-term expansion and renewal lease in July with one of our major tenants, which tripled in size to 160,000 square feet.
Speaker Change: Well, the Chicago market is challenging. We are benefiting significantly from the quality of our asset with our market-leading work-life amenity program and rock-solid sponsorship.
Speaker Change: it.
Speaker Change: Turning to the capital markets now.
Speaker Change: While the financing markets remain challenging for office and banks remain out for the market, we are beginning to see some early signs of improvement with the CMBS market open again for selective high-quality assets, and even ones that are less straightforward.
Operator: Rates are beginning to moderate, and the SOFR forward curve is projected to come down meaningfully over the next year, which should help borrow. We continue to be very active in the capital market. In June, we refinanced the loan at 645th Avenue and our street retail, JB, eliminating the $500 million recourse obligation to the company. While the rate is higher than we'd like, this financing demonstrates that the markets are open again for high-quality retail and office.
Speaker Change: Rates are beginning to moderate, and the SOFR forward curve is projected to come down meaningfully over the next year, which should help borrowing rates.
Speaker Change: We continue to be very active on the capital markets front.
Speaker Change: In June , we refinanced the loan at 645th Avenue in our street retail JV, eliminating the $500 million recourse obligation to the company. While the rate is higher than we'd like, this financing demonstrates that the markets are open again for high-quality retail and office assets.
Operator: It's 731 Lexington Avenue, with the Bloomberg renewal now complete. We're in the process of refinancing this loan as well. We will then have taken care of all of our significant 2024 maturities and are in the process of addressing our 2025. Our balance sheet remains in very good shape, with strong liquidity of $2.7 billion, including $1.1 billion of cash and restricted cash and $1.6 billion undrawn under our $2.17 billion Revolving Credit Facility. With that, I'll turn it over to the operator for Q&A.
Speaker Change: At 731 Lexington Avenue, with the Bloomberg renewal now complete, we're in the process of refinancing this loan as well.
Speaker Change: We will have then taken care of all of our significant 2024 maturities and are in the process of addressing our 2025 maturities.
Speaker Change: Our balance sheet remains in very good shape, with strong liquidity of $2.7 billion, including $1.1 billion of cash and restricted cash, and $1.6 billion undrawn under our $2.17 billion
Speaker Change: Revolving Credit Facilities. With that, I'll turn it over the operator for Q&A.
Operator: Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touchtone phone. If you wish to be removed from the queue, please press star then 2. If you are using a speakerphone, you may need to pick up the handset first before pressing the number.
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: If you have a question, please press star then 1 on your touch-tone phone.
Speaker Change: If you wish to be removed from the queue, please press star then 2.
Speaker Change: If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers.
Steve Sakwa: Once again, if you have a question, please press stars and one on your touchstone. Each caller will be allowed to ask one question and a follow-up question before we move on to the next caller. Today's first question comes from Steve Sakwa with Evercore ISI. Please go ahead.
Speaker Change: Once again, if you have a question, please press star then 1 on your touch-tone phone.
Speaker Change: Each caller will be allowed to ask one question and a follow-up question before we move on to the next caller.
Steve Sakwa: Yes, thanks. Good morning.
Speaker Change: Today's first question comes from Steve Sakwa with Evercore ISI. Please go ahead.
Steve Sakwa: Steve, you certainly piqued my interest with your comments about 770 Broadway. I'm just not sure I fully understand, I guess, the kind of the transaction and discussion because I know that building is about 80% occupied today with a couple of different tenants. So I'm just not exactly sure if this new tenant subleases the space from the old tenant or just kind of how that... I guess I didn't really quite understand the whole transaction that's pending.
Speaker Change: Yes, thanks. Good morning. Steve, you certainly piqued my interest with your 770 Broadway comments. I'm just not sure I fully understand.
Steve Sackwell: I guess, kind of the transaction in discussion, because I know that building is about 80% occupied today with a couple of different tenants, so.
Speaker Change: I'm just not exactly sure.
Speaker Change: If this new tenant subleases the space from the old tenant or just kind of how that what I guess I didn't really quite understand the whole transaction that's pending.
Stephen Roth: Steve, I wish I could help you, but I've said all that I'm going to say on that topic. It's an important transaction. We're under confidentiality agreements, and so that's all I'm going to say is that there's an important transaction in process.
Speaker Change: Steve, I wish I could help you, but I've said all that I'm going to say on that topic. It's an important transaction. We're under a confidentiality agreement.
Speaker Change: so that's that's all I'm going to say is that there's a an important transaction in process
Speaker Change: Sorry
Steve Sakwa: Okay, maybe switching gears to the two pen, and I guess, Michael, the pipeline you talked about sounds quite strong. You know, can you maybe just provide a little bit more color on the types of tenants that you're speaking to? And, you know, are these tenants that are, I guess, currently already in the marketplace and more at least exploration driven or these kind of new requirements in the market looking at looking at two pen?
Speaker Change: Okay, maybe switching gears to the two-pen and I guess, Michael, the pipeline you talked about sounds quite strong.
Speaker Change: You know, can you maybe just provide a little bit more color on the types of tenants that you're speaking to? And, you know, are these tenants that are, I guess, currently already in the marketplace and more at least exploration driven, or these kind of new requirements in the market, looking at looking at 2PEN?
Glen Weiss: Hi Steve, it's Glen. How are you?
Glen Weiss: So it's a mix of both tenants expiring soon and some tenants expiring in the next few years. But I'll tell you at Penn, too, we have tenants applying for the same space right now, both in the podium and in the tower. We have technology interests, fashion interests, financial interests, legal interests, academic interests, and media. We have interests from all types of sectors in every space. We're in different sorts of paper negotiations with all these tenants.
Speaker Change: Hi Steve, it's Glen. How are you?
Speaker Change: So it's a mix of both tenants expiring soon and some tenants expiring in the outer years.
Speaker Change: But I'll tell you at Penn too, we have tenants applying for the same space right now, both in the podium and in the tower.
Speaker Change: We have technology interests, fashion interests, financial interests, legal interests, academia interests.
Speaker Change: Media. We have interests from all types of sectors on all the space.
Speaker Change: We're in different sorts of paper negotiation with all these tenants, so we're seeing very, very strong activity as we sit here. Similarly, at PEN1, we've leased about 155,000 feet at PEN1 this year.
Glen Weiss: So we're seeing very, very strong activity as we sit here. Similarly, at Penn One, we've leased about 155,000 feet of space at Penn One this year at rents that are well above where we thought we'd wind up there, and, you know, the types of tenants keep coming in. We have a lease out right now with a major pharmaceutical company for two floors, and we have other activity coming in at Penn One. And with that, we're also seeing great activity around the district at Penn Eleven and some of the other properties.
Speaker Change: at rents that are well above where we thought we'd wind up there and you know the types of tenants keep coming in. We have a lease out right now with a major pharmaceutical company for two floors and we have other activity coming in at Penn One.
Speaker Change: And with that, we're also seeing great activity around the district.
Glen Weiss: So I would tell you we're really on all cylinders now in Penn. When you walk the streets, it's really spectacular. Everything is looking great. The reception is better, better, and better as each day passes. So we're super excited about what's to come.
Speaker Change: at Penn 11 and some of the other properties. So I would tell you we're really all cylinders now in Penn. When you walk the streets, it's really spectacular. Everything is looking great. The reception is better, better, and better as each day passes.
Speaker Change: So we're super excited about what's to come.
Speaker Change: Okay, thanks.
John Kim: Thank you. And our next question today comes from John Kim at BMO Capital Markets. Please go ahead.
Speaker Change: Thank you. And our next question today comes from John Kim at BMO Capital Markets. Please go ahead.
John Kim: Thank you. On the Uniqlo sale, can you just talk about the earnings impact? I think you sold at a great price per square foot, but I think your preferred will be redeemed, so it might be slightly diluted in the near term. And also, you still own five assets on 5th Avenue in that prime Corridor between 51st and 55th Street. Is $20,000 per square foot the right way to value the remaining retail, and do you plan to monetize any further assets?
John Kim: Thank you. On the Uniqlo sale, can you just talk about the earnings impact? I think you saw that the great
John Kim: [inaudible]
Michael Franco: There's a lot in that, John, but I'll try to remember it if I forget to remind myself, and I think you've been you've been a steadfast believer in retail the whole time, which we appreciate. Look, it's obviously a transaction we're quite pleased about. We think it's an outstanding execution.
Speaker Change: There's a lot in that, John . I'll try to remember it in the end. If I forget, remind me, but thank you. I think you've been a steadfast believer in our retail the whole time, which we appreciate.
Michael Franco: And I think if you look at the valuation, and Steve talked about the cap rates and the value, the income is actually up a little bit from the 2019 transaction. Unknown, you know, that would effectively tell you that the retail value that we sold in 2019 is sort of back to those levels. So you take the preferred and just the where the value of the equity was marked at the time, that's about $16 a share, which I don't think our stock price continues to reflect at all.
Speaker Change: Look, it's obviously a transaction we're quite pleased about. We think it's an outstanding execution and I think if you look at the valuation, and Steve talked about the cap rates and the value, the income's actually up a little bit from the 2019 transaction.
Michael Franco: So, you know, eventually people appreciate the valuation of Fifth Avenue, but on the per square foot basis, 20,000 is, you know, that's the entire space. You know, I think the most important thing to focus on when you're looking at Fifth Avenue retail is what's the amount of frontage, what's the amount of ground floor square footage. And when you take out a small allocation for the second floor, given the rents are obviously quite a bit less, it's about $50,000 a square foot per grade square foot. So I think that's a more representative metric for Fifth Avenue retail in terms of the grade screen.
Speaker Change: And when you take out, you know, a small allocation for the second floor, given the rents are obviously quite a bit less.
Steve Sackwell: It's about $50,000 a square foot per grade square.
Speaker Change: I think that's a more representative metric for Fifth Avenue retail in terms of the grade screen. So you have to sort of look asset by asset.
Michael Franco: So you have to sort of look asset by asset. But, you know, with every user sale, and we've now seen three major sales, and I think we alluded to that in the last couple of calls. We expected there would be some. Obviously, we knew this one was in the works, but I don't think you've seen the last. As Steve said, each sale creates more scarcity in terms of what's remaining on fit, which should drive both rental rates as well as valuations for those that want to keep buying. So we're pleased that we own a significant portion of the frontage still. We still own north of 20% of the prime Upper Fifth Avenue frontage, and so that puts us in a good place.
Michael Franco: Let's talk about the earnings impact, which I think was when he asked your first question. So all the proceeds will go to repay our preferred. We're earning about four and three-quarters of that today. The entire amount, if you remember the original structure of the transaction, you know, the preferred was a proxy for first mortgage financing, and it allowed us to defer any gain there. When we refinance the preferred, you know, that gain continues to get deferred until it gets actually, you know, paid off. That triggers the gain.
Michael Franco: So the entire 340 will be a gain. It likely will close next year and, you know, depending on what other transactions we have in terms of losses, and we already have some that have been monetized, we'll be able to keep some or all that cash. We think we'll be able to keep a significant portion of that cash, if not all of it. And so, you know, I would tell you at a minimum it'll be a push in terms of earnings, and hopefully, it will be accretive to the tune of a few million dollars.
Speaker Change: It likely will close next year. And you know, depending on what other
Speaker Change: Transactions we have in terms of losses and we already have some that have been monetized
Speaker Change: We think we'll be able to keep a significant portion of that cash, if not all of it.
Speaker Change: And so, you know, I would tell you at a minimum, it'll be a push in terms of earnings.
Speaker Change: and hopefully it will be accretive to the tune of a few million dollars if you assume we redeploy that. If nothing else, just the payoff debt, let's call it six and a half percent in terms of where it is today. So I think I covered everything you asked, but if not, you know, tell me.
Michael Franco: If you assume we redeploy that, if nothing else, just to pay off debt, let's call it six and a half percent in terms of where it is today. I think I covered everything you asked, but if not, you know.
John Kim: You covered it all. Thank you. And then my second question is on Pen Tu and the timing of MSG moving into that space, as well as the capitalized interest. If you could just remind us of your capitalized interest policy when you start expensing the interest on that project,
Speaker Change: You covered it all. Thank you. And then my second question is on...
Speaker Change: Pen2, and the timing of MSG moving into that space, as well as the capitalized interest. If you could just remind us of your capitalized interest policy when you start expensing the interest on that project.
Tom Sanelli: Sure, John, it's Tom. MSG, we actually delivered some of their space, a portion of their space six months early. So in our second quarter results, you're seeing the impact of that. It gets fully delivered by the fourth quarter.
Tom: Sure, John , it's Tom. MSG, we actually delivered some of their space, a portion of their space, six months early. So in our second quarter results, you're seeing the impact of that. It gets fully delivered by the fourth quarter. So our fourth quarter will be a full quarter of MSG rent at the new rent.
Tom: and then obviously 25 will be a full year of MSG on a gap basis.
Tom Sanelli: So our fourth quarter will be a full quarter of MSG rent at the new rent, and then obviously, 25 will be a full year of MSG on a gap as it relates to capitalized interest. You know, as we indicated in Michael's prepared remarks and on previous calls, capitalized interest will roll down in 2025, but most of that will be offset by additional gap revenue as it relates to some of the large leasing we did this past year with Slendian Gates and Spalding and other
Tom: As it relates to capitalized interest.
Speaker Change: You know, as we indicated in Michael's prepared remarks and on previous calls, capitalized interest will roll down in 2025, but most of that will be offset by additional gap revenue as it relates to some of the large leasing we did this past year with Slendian Gate, King & Spalding, and others.
Tom Sanelli: And do you do that floor-by-floor as it's delivered, or the entire building? It's going to be a...
Speaker Change: And you do that floor-by-floor as it's delivered, or the entire building at once.
Tom Sanelli: It's going to be a portion of the building because as we have some open development going on, some of that interest will continue to be capitalised in 2020.
Floris van Dijkum: Thank you. And our next question today comes from Floris Van Dijkum with Compass Point. Please go ahead.
Speaker Change: Thank you. And our next question today comes from Flores Van Dykem with Compass Point. Please go ahead.
Floris van Dijkum: Hey, good morning, guys. Thanks for taking my question.
Speaker Change: Hey, good morning guys. Thanks for taking my question.
Floris van Dijkum: Obviously, very interesting and bullish news on 5th Avenue. I also noticed that your... rent spreads on your retail portfolio were positive to the tune of around 13%. Maybe you could talk a little bit more about some of the upside potential. Is that what you're seeing in terms of leasing activity? And also, obviously, now that Uniqlo owns its space, there's less space to lease in it, particularly in the upper Fifth Avenue corridor. What are your expectations for market rental growth and lease spreads in that area?
Speaker Change: Obviously very interesting and bullish news on on Fifth Avenue. I also noticed that your
Speaker Change: rent spreads on your retail portfolio were positive by the tune of around 13%.
Michael Franco: Good morning, Floris. On your first question, in terms of retail activity, I think we talked about this on the last couple of calls in terms of just the general market dynamics where the, you know, retailers are more active, and we're seeing, you know, continued recovery there, both in terms of rents improving and vacancy rates declining, and that certainly will continue. Yeah, I think if you look at our activities quarter, it wasn't wasn't very meaningful, but it tends to be a little lumpy.
Speaker Change: Good morning, Floris. You know, on your on your first question, you know, in terms of retail activity, I think we've...
Floris: You know talked about this on the last call couple calls in terms of just the general market dynamics where the You know retailers are more active and we're seeing you know continued recovery there both in terms of the rents Improving and vacancy rates declining and that and that certainly continues
Speaker Change: Yeah, I think if you look at our activity this quarter, you know, it wasn't very meaningful but it tends to be a little lumpy.
Michael Franco: But as I look forward to our pipeline, it's quite active. You know, we probably have close to 160,000 feet in lease negotiations right now, and probably another 150,000 feet of deals in various stages of letters of intent. So a lot of activity, I would say principally focused on Penn as well as in Times Square where, you know, we have space that, obviously, we've redeveloped on Penn that we've delivered or are delivering and then, you know, backfilling, you know, some of the space, particularly 1540 Broadway.
Speaker Change: and probably another 150,000 feet of...
Speaker Change: deals in various stages of letters of intent. So a lot of activity, I would say that's principally focused in pen.
Speaker Change: as well as in Times Square where, you know, we have space that obviously we've redeveloped in Penn that we've delivered or delivering and then, you know, backfilling, you know, some of the space, particularly 1540 Broadway. So.
Michael Franco: That's where the activity is. And I would say the rents are, you know, at pretty healthy levels relative to historical levels, particularly in Times Square. You know, Fifth Avenue, we have one vacancy that comes up later this year. There is activity there.
Speaker Change: Fifth Avenue, we have one vacancy that comes up.
Speaker Change: later this year. There is activity there. It's hard to extrapolate exactly just because there's not a tremendous amount of vacancy and every space is so particular in terms of where users want to be and how much space they want and whatnot. But, you know, rents are, you know, I think
Michael Franco: It's hard to extrapolate exactly just because there's not a tremendous amount of vacancy. Every space is so particular in terms of where users want to be and how much space they want and whatnot. But, you know, rents have recovered pretty significantly there. So, again, we see continued momentum. You know, I think, in terms of the near term, we don't have a lot of roles coming up in the fifth near term.
Speaker Change: It recovered pretty significantly there.
Speaker Change: so again we see we see continued momentum
Michael Franco: So I don't know that really, you know, the near term is to mark that either way is really relevant. You know, there's duration on most of those leases other than that one small lease that's coming up.
Speaker Change: You know, I think, you know, in terms of near-term, we don't have a lot of roll coming up on fifth near-term, so I don't know that really, you know, the near-term opportunities to mark that either way is really irrelevant, you know, there's duration on most of those leases other than that one small lease that's coming up at the end of the year.
Floris van Dijkum: Thanks, Michael. And maybe my follow-up question is, if you could talk a little bit about your plans for the 450 million of unsecured debt that matures, I think, in January of 25. You said you're in the market, looking at some of those things. Is the idea to refinance that? Or will you pay that off with cash? Or could you talk a little bit about your thinking about that? Yeah. Like, as we said...
Speaker Change: Thanks, Michael. And maybe my follow-up is, if you could talk a little bit about your plans for the $450 million of unsecured debt that matures, I think, in January of 2025. You said you're in the market looking at some of those things. Is the idea to refinance that or will you pay that off with cash? Or if you can talk a little bit about your thinking about that.
Michael Franco: Like, as we sit here today, you know, the plan is to pay it off. You know, we've got significant cash on hand, and obviously, given the announcements in the last 24 hours, we've got more cash coming in. So that's the plan. Like, as you would expect, we are, you know, attuned to the markets and what's going on. You know, with rates trending down, with spreads tightening, we obviously look at the various financing markets to see where those are. That presents an alternative that's compelling. And we're pleased with the direction of that. But, you know, as we sit here today, our plan is to pay it off.
Speaker Change: Yep.
Camille Bonnel: Thank you. And our next question today comes from Camille Bonnel with Bank of America. Please go ahead.
Speaker Change: Given the announcements
Speaker Change: in the last 24 hours. We've got more cash coming in. So that's the plan. Like, as you would expect, we are, you know, tuned to the markets and what's going on.
Speaker Change: You know, with rates trending down, with spreads tightening, you know, we obviously look at the various financing markets to see where those are. That presents an alternative that's compelling. And we're pleased with the direction of that. But, you know, as we sit here today, plan is to pay it off.
Michael Franco: Thanks, Michael.
Michael Franco: Yes.
Speaker Change: Thank you. And our next question today comes from Camille Bonnel with Bank of America. Please go ahead.
Camille Bonnel: Good morning, Glen. Glen, I wanted to follow up on the leasing side, given your comments around the improving outlook. Was the handshake deal on 770 Broadway included in the pipeline from last quarter, or did it more recently emerge? And just outside of the 770 Broadway discussions, curious to get your thoughts on what activity are you seeing specifically around the large office users.
Camille Bonnell: Good morning. Glen, I wanted to follow up on the leasing side, giving your comments around the improving outlook.
Camille Bonnell: Was the Handshake deal on 770 Broadway included in the pipeline from last quarter or did it more recently emerge?
Speaker Change: And just outside of the 7-7 Broadway discussions, curious to get your thoughts on what activity are you seeing specifically around the large office users?
Glen Weiss: Hi, The 770 transaction was included within Michael's remarks in terms of the pipeline. In terms of overall activity, you know, we're really seeing activity throughout the portfolio, really everywhere right now. If I look at the list of the action, the leases out, and the proposals in, we're really seeing it very well spread out across all the buildings. And the one thing I would note is that the bread and butter tenants, the 10, 20, 30,000 foot types, are really coming into the market more so now than they have in a while.
Speaker Change: Hi. The 770 transaction was included within Michael's remarks.
Speaker Change: In terms of the pipeline, in terms of overall activity, and we're really seeing activity throughout the portfolio.
Speaker Change: really everywhere right now. If I look at the list of the action, the leases out and the proposals in
Speaker Change: We're really seeing it very well spread out through all the buildings.
Speaker Change: And the one thing I would note is the bread-and-butter tenants, the 10-, 20-, 30,000-foot types are really coming into the market more so now than they have in a while. And we're seeing that on a lot of the properties, particularly in Penn and in Midtown.
Glen Weiss: And we're seeing that in a lot of properties, particularly in Penn and in Midtown. So I'd tell you that the market is as well mixed as it's been in a long time. Different size tenants, different genres of tenants, you know, so we're really seeing a very good consistent mix, which is, you know, helping the market, helping the volume. And as you can see in a lot of the reports, New York is clearly leading that chart by space throughout the country.
Speaker Change: I'd tell you that the market is as well-mixed as it's been in a long time. Different size tenants, different genre of tenants, so we're really seeing a very good consistent mix.
Speaker Change: which is you know helping the market, helping the volume and as you can see in a lot of the reports, New York is clearly leading that charge by spade throughout the country.
Michael Franco: And for my follow-up, I was wondering if we can get your latest thoughts on how taxable income is trending. Following the pickup in dispositions this year, are we likely to see more distributions paid out, or is it still uncertain given the known move-outs? Thank you.
Speaker Change: And for my follow-up, I was wondering if we can get your latest thoughts on how taxable income is trending.
Speaker Change: Just following the pickup in dispositions this year, are we likely to see more distributions paid out or is it still uncertain given the known move-outs? Thank you.
Camille Bonnel: Still uncertain, Camille, depending on what ultimately ends up closing, not closing, etc., then we'll have a better sense. You know we have a decent sense, and they can go in a number of different directions.
Speaker Change: still uncertain Camille you know as we as we get further on the year depending on what ultimately ends up closing not closing etc then we'll you know we'll have a we'll have a better sense you know we have a decent sense and they can go a number of different directions still
Michael Griffin: Thank you. And our next question today comes from Michael Griffin with Citi. Please go ahead.
Speaker Change: Thank you. And our next question today comes from Michael Griffin with Citi. Please go ahead.
Michael Griffin: Great, thanks. I'm wondering if you can give us a sense of how concessions have been trending. I noticed it was notably lower this quarter, probably driven by the Bloomberg extension. But, you know, have you seen the concession environment improve at all? Or is it pretty steady relative to recent quarters?
Michael Griffin: Great, thanks. I'm wondering if you can give us a sense of how concessions have been trending. I noticed it was, I think, notably lower this quarter, probably driven by the Bloomberg extension. But, you know, have you seen the concession environment improve at all, or is it pretty steady relative to recent quarters?
Glen Weiss: Hi Michael, it's Glen. So concessions have stabilized, you know, they're stubbornly high, but they've stabilized, they have not gone up in some time. That's now being somewhat offset by higher rents in certain properties in certain sub-districts in our portfolio. So you know that we're seeing positive signs in terms of net effective rents in some of our properties. So look, the hope is as the market tightens, we could bring the TIs and pre-rents down, but certainly they've stabilized now for a bunch of quarters, as we've been stating on these calls.
Michael Griffin: Hi Michael, it's Glen. So concessions have stabilized. You know, they're stubbornly high, but they've stabilized. They have not gone up in some time.
Speaker Change: That's now being somewhat offset by higher rents in certain properties and certain sub-districts in our portfolio.
Speaker Change: So you know that we're seeing positive signs in terms of net effective rent in some of our properties.
Speaker Change: So look, the hope is as the market tightens, we could bring the TIs and pre-rents down, but certainly they've stabilized now for a bunch of quarters as we've been stating on these calls.
Michael Griffin: Thanks, Glenn. I appreciate that. And then Steve, just on your kind of macro comments about the interest rate environment and the Fed's kind of fight against inflation, you know, obviously, I think lower interest rates are better for offices overall. But just given the chatter that we've heard recently around recessionary fears, I guess, how do you balance the more favorable outlook for interest rates mixed with what could be a recessionary scenario that would probably negatively impact the office?
Glenn: Thanks for that Glen, I appreciate that. And then Steve, just on your kind of macro comments about the interest rate environment and the Fed's kind of fight against inflation, you know, obviously, I think lower interest rates are better for office overall. But just given the chatter that we've heard recently around recessionary fears, I guess, how do you balance the more favorable outlook for interest rates, mixed with what could be a recessionary scenario that would probably negatively impact the office sector?
Stephen Roth: The biggest driver and the biggest, our biggest cost, is The Closed Capital. So the real estate industry has always thrived and increased in value in the interest rate cycle as interest rates are trending down. The expectation of most market players is that we're on the other side of the interest rate cycle, and interest rates will be coming down. However, we are certainly not planning the business for interest rates to go down to the zero levels that they were. But hopefully, they will stabilize at a normalized level, and we'll see how it works out.
Steve Sackwell: The biggest driver and our biggest cost is the cost of capital.
Steve Sackwell: So the real estate industry has always thrived and increased in value in the interest rate cycle as interest rates are trending down.
Steve Sackwell: The expectation of most market players is that we're on the other side of the interest rate cycle and interest rates will be coming down. We are certainly not planning the business for interest rates to go down to the zero levels that they were.
Steve Sackwell: but hopefully they will stabilize at a normalized level and we'll see how it works out.
Michael Griffin: Great, that's it for me. Thanks for the time.
Speaker Change: Great, that's it for me. Thanks for the time.
Dylan Burzinski: And our next question today comes from Dylan Burzinski with Green Street. Please go ahead.
Speaker Change: Thank you.
Speaker Change: And our next question today comes from Dylan Burzinski with Green Street. Please go ahead.
Dylan Burzinski: Hi guys, thanks for taking the question. I appreciate the comments on street retail activity picking up, but I guess as we look at the portfolio today, I think you ended the quarter at a high 70% occupancy, which is still well below where it was pre-COVID. I guess as you guys think about that business moving forward, I mean, do you guys imagine that eventually getting back to where it was pre-COVID, or do you sort of imagine an environment where, you know, things are improving, but you still don't necessarily see a recovery back to those pre-COVID levels? Oh, good morning.
Dylan Brzezinski: Hi guys, thanks for taking the question.
Dylan Brzezinski: I appreciate the comments on street retail activity picking up, but I guess as we look at the portfolio today,
Michael Franco: Bill, good morning. Look, I think the number you referenced on the occupancy rate, you know, I think we got to put a big asterisk next to that, which is it's really, you know, that lower numbers driven by Manhattan Mall, right? So JCPenney went bankrupt, vacated that store, and that caused about 10 points of occupancy decline there. Now we've been, you know, given everything else we're doing in Penn, evaluating what to do with that space.
Bill: Good morning.
Michael Franco: Not necessarily wanting to lock it up long term, certainly with a tenant that's not paying a rent that we think is appropriate, and recognizing that everything we're doing in the district is going to accrue to that asset over time. So, you know, we've done a number of temporary deals. In fact, we have one with Netflix that's opening right now.
Speaker Change: I'm not necessarily wanting to lock it up long term, certainly with a tenant.
Bill: that's not paying a rent that we think is appropriate and recognizing that everything we're doing in the district is going to accrue.
Michael Franco: And that's probably the plan. We don't, we don't actually, when we do that, we don't take that into occupancy. In fact, maybe we should have taken that service. By and large, it's really not a focus of ours to lease a lawn churn unless we get a robust rent. So if you take Manhattan Mall out, that 77, if you will, goes to like 87. And, you know, we've got the other vacancy they're working on.
Speaker Change: By and large, it's really not a focus of ours to lease a lawn churn unless we get a robust rent. So, if you take Manhattan Mall out, that 77, if you will, goes to like 87.
Michael Franco: So the answer is, you know, the bottom line is yes, we think that number is going to get back up to levels we were at historically. But keep in mind, there's 10 points of frictional vacancy right in our structural vacancy that is due to Manhattan Mall.
Connor Mitchell: Thank you. And our next question today comes from Connor Mitchell, Piper Sandler. Please go ahead. Hey, good morning.
Connor Mitchell: Hey, good morning. Thanks for taking my question. So there's been a lot of talk about the high street retail and how the whole environment is rebounding in terms of that area. We've seen it from, you know, rents coming back, retailers requiring spaces, they're leasing. But just thinking about one rent in particular, there were articles in June or July about Sephora recently negotiating their rents down by two-thirds on Madison. So I guess I'm just wondering if you guys could help us think about the juxtaposition between some of the metrics we've seen recently, your comments, and then some specific transactions, such as the Sephora one.
Unknown Executive: Unknown Speaker, on the support deal you mentioned of 520 Madison, I wouldn't call that a market transaction; it was a very short-term deal. I believe it was only for one or two years at the most. So I wouldn't take into account as it relates to the market and what's going on in that corridor.
Speaker Change: So there's been a lot of talk about the high street retail and how the whole environment is rebounding in terms of that area. We've seen it from, you know, rents coming back.
Speaker Change: Glen, hi. You know, on the support deal you mentioned of 520 Madison, I wouldn't call that a market transaction. It was a very short-term deal. I believe it was only for one or two years at the most. So I wouldn't take that into account as it relates to the market and what's going on in that corridor. Thank you. Thank you.
Michael Franco: I might add to that, but... I think when you define High Street, I don't know that I would characterize 520 Madison as High Street. You know, yes, it's Madison Avenue, but that's not the prime stretch of Madison Avenue; the prime stretch of Madison Avenue is 57th to probably 64th, which is where you see rents that are jumping north of $1,000 a square foot. So, retail that is not prime-prime is, you know, it's coming off older rents that have not seen the same level of recovery.
Speaker Change: I might add on to that, but...
Speaker Change: You know, retail that is not prime prime.
Michael Franco: It's recovering, but it's not seeing the same level of recovery as prime-fifth, prime-time-square, and, you know, that prime stretch of Madison. So, both the short-term nature as well as, and we've always talked about this, You know, the prime High Street is really scarce, and you have to focus on what that means. It's different than any other set of blocks in the city, and, you know, I think the beauty of our retail is that it is all prime High Street.
Speaker Change: But it's not seeing the same level of recovery as prime fifth, prime times square.
Speaker Change: and you know that prime stretch of Madison. So both the short-term nature as well as and we've always talked about this.
Speaker Change: You know, the prime high street is really scarce, and you have to focus on what that means. It's different than any other set of blocks in the city. And, you know, I think the beauty of our retail is it is all prime high street.
Michael Franco: Very helpful, appreciate the color. And then maybe just one more quick one. There was a lot of financing activity, activity of the quarter, obviously. And then 645th was refinanced at a fixed rate of 750. I'm just curious if that's a good rate that we should think about for some upcoming maturities such as 731 LEX or any others moving forward.
Speaker Change: Very helpful. Appreciate the color. And then maybe just one more quick one. You said a lot of financing activity, activity of the quarter, obviously. And then.
Unknown Executive: Unknown Speaker You know, that's probably, you know, as we sit here today, that's probably 50 basis points higher than it would be if we did it today, just given what's happened in the 10 years or in the future, in the five years. So obviously, the base rate matters, spreads matter, etc.
Speaker Change: You know, that's probably, you know, as we sit here today, that's probably 50 basis points higher than it would be if we did it today, just given what's happened in the 10 year or in the future.
Unknown Executive: But, you know, 731, I think you'll see gets done much tighter than that, as reflected in the long-term lease that we executed last. I think it's asset-dependent, but I think, in general, the markets continue to heal. I think you'll see those rates trend down to some extent just by the fact that base rates are down.
Speaker Change: on the five-year. So, obviously the base rate matters, spreads matter, etc. But, you know, 731, I think you'll see, gets done much tighter than that, you know, reflected in the long-term lease that we executed last.
Speaker Change: Thank you.
Ronald Kamdem: And our next question today comes from Ronald Kamdem with Morgan Stanley. Please go ahead. Hello, Mr. Campbell. Your line is open. Perhaps you're muted. Yes. Can you hear me now? Yes. Just two quick ones.
Speaker Change: And our next question today comes from Ronald Kamdem with Morgan Stanley . Please go ahead.
Speaker Change: Hello, Mr. Campbell. Your line is open. Perhaps you're muted.
Ronald Camden: Yep, can you hear me now?
Ronald Camden: OK, great. Just two quick ones from me.
Ronald Camden: Going back to the 2.6 million square feet pipeline, can you break out how much of that relates to Penn 2 and the two floors that you mentioned on Penn 1 that's out for lease, is that on vacant space?
Glen Weiss: The PEN1 dealmaking is on vacant space. I really don't want to get into much more detail than I have already on PEN2, but you know, a good amount of the pipeline is PEN2, with a plethora of deals brewing as we speak in different, you know, parts of negotiations, but rather than I'll get into the very much detail of how many feet is what at this point. Sure thing. And if I could just
Speaker Change: The PEN 1 deal-making is on vacant space. I really don't want to get into much more detail than I have already on PEN 2, but, you know, a good amount of the pipeline is PEN 2, with a plethora of deals brewing as we speak in different, you know, parts of negotiations, but rather not get into the very much detail of how many feet is what at this point.
Ed: Sure thing. Ed, if I could just sneak in a quick one, you know, can you sort of comment on any updated plans for the former Hotel Penn site given all the leasing activity you're seeing on Penn One and Penn Two?
Glen Weiss: I think, as we've talked about in the past, the cost of construction, financing, and lack of availability make it difficult to build right now. It's a prime site, arguably the best site left in the city, but it's not coming.
Speaker Change: You know, it's like I think as we've talked about in the past.
Speaker Change: you know, the cost of construction, financing, lack of availability that makes it difficult to build right now. So, like it's a prime site, you know, arguably the best site for
Speaker Change: left in the city, but, you know, it's, it's, it's, the day has not come yet.
Speaker Change: Thanks so much. That's it for me.
Glen Weiss: Thank you. And our next question today comes from Caitlin Burrows at Goldman Sachs. Please go ahead.
Speaker Change: Thank you. And our next question today comes from Caitlin Burrows at Goldman Sachs. Please go ahead.
Caitlin Burrows: Hi, good morning. Earlier, you mentioned how the leases you were doing at 555 California all had positive mark-to-market. So I guess, could you talk about that a little bit more? How long do you think those positive spreads at 555 will last for? And I guess, given the occupancy there, how would you characterize market rents there? Like, do you have the ability to push for more, or to what extent does vacancy in the market or submarket limit the pricing side?
Caitlin Burrows: Hi, good morning. Earlier you mentioned how the leases you were doing at 555 California all had positive mark-to-market. So I guess could you talk about that a little bit more? How long do you think those positive spreads at 555 can last for? And I guess given the occupancy there, how would you characterize market rents there? Like do you have the ability to push more or to what extent is vacancy in the market or sub-market limit the pricing side?
Glen Weiss: Look, I think what we're seeing at a 5-5 is that it is the best building in San Francisco. Our tenants have all remained, our rents have held very strong, so this building is really insulated from the overall market and what you're seeing statistically in the city. Without getting into much detail on the negotiations we have going on with our tenants, we're seeing a lot of strength. We're even seeing growth in the deals, and expansion with these tenants.
Speaker Change: Look, I think what we're seeing at 5.5 is that it is the best building in San Francisco.
Speaker Change: Our tenants have all remained. Our rents have held very strong. So you know this building is really insulated from the overall market and what you're seeing statistically in the city.
Speaker Change: You know, without getting into much detail on the negotiations we have going on with our tenants, you know, we're seeing a lot of strength. We're even seeing growth in the deals, expansion with these tenants.
Glen Weiss: So, you know, what's going to happen in terms of these rents? I mean, look, the rents at our building have historically, you know, kept going up. We feel very good about the rental rates we're achieving right now. You know, we're ahead of the market. And we expect to continue to be ahead of the market as we move forward.
Speaker Change: So, you know, what's going to happen in the future in terms of these rents? I mean, look, the rents at our building have historically, you know, kept going up.
Speaker Change: We feel very good about the rental rates we're achieving right now, you know, we're ahead of the market, we expect to continue to be ahead of the market as we move forward on.
Caitlin Burrows: Okay, got it. And then back in the prepared remarks, you gave some color on the outlook to 25, I think, suggesting that with the leasing that's been completed and pen to coming online, late 25 could see maybe an improvement in earnings. I guess, first, is that the right takeaway? But then, when you think about all of the moving parts, are there additional 2025 large lease expirations we should be aware of? And do you have any insight into those tenants' thoughts at this point?
Speaker Change: Okay, got it. And then back in the prepared remarks, you gave some color on the outlook to 25, I think, suggesting that with the leasing that's been completed and PEN2 coming online, that late 25 could see maybe an improvement in earnings. I guess, first, is that the right takeaway? But then B, when you think about all of the moving parts, are there additional 2025 large lease expirations we should be aware of? And do you have any insight into those tenants thoughts at this point?
Glen Weiss: And we have a a
Speaker Change: And we have a modest expiration schedule in 25. We're obviously speaking to all the tenants expiring during that period.
Glen Weiss: We have a modest expiration schedule in 25. We're obviously speaking to all the tenants expiring during that period. But I think, you know, generally speaking, between 280, 770, and 1290, we've seen the real tide of expirations now. And as we go to 25, you know, and forward, you know, we're seeing a calming of those big expirations.
Speaker Change: But I think, you know, generally speaking, between 280, 770, and 1290, we've seen the real tide of expirations now, and as we go to 25, you know, and forward, you know, we're seeing a calming of those big expirations.
Speaker Change: Okay, thanks.
Glen Weiss: Thank you. And our next question today comes from Tony Paolone with J.P. Morgan.
Speaker Change: Thank you. And our next question today comes from Tony Paolone.
Tony Paolone: Yeah, thanks.
Tony Paolo: with J.P. Morgan. Please go ahead. Yeah, thanks. Um, you know, here's, I mean, I think Steve mentioned the C-C-C-C-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S-S
Tony Paolone: I mean, I think Steve mentioned 666. I don't know, Sarah's one of several. I don't know.
Operator: Thank you, everyone, for tuning in. Part of the interruption here, Mr. Paolone, your line is coming in very poorly. I'm going to disconnect your line, or I'm going to move on from you. If you can dial back in, we can get you right back in. Our next question today comes from Nick Yulico with Scotiabank. Please go ahead.
Speaker Change: Pardon the interruption here, Mr. Paolone, your line is coming in very poorly. I'm going to disconnect your line, or I'm going to move on from you. If you can dial back in, we can get you right back into the queue.
Nick Yulico: Thanks. I know you talked about some of the leasing underway already for this year. Can you give us a feel for how occupancy might trend for the back half of the year in the office portfolio?
Speaker Change: Our next question today comes from Nick Yulico with Scotiabank. Please go ahead.
Nick Ulica: Thanks. Yeah, I know you talked about some of the leasing underway already for this year. I guess, can you give us a feel for how occupancy might trend for the back half of the year in the office portfolio?
Michael Franco: Yeah, you know, we're about 89.3 today. You know, we know that's going to trend down a bit next quarter. So just given that META is vacating 275,000 square feet at 770 Broadway.
Nick Ulica: Yeah.
Speaker Change: We're at about 89.3 today. We know that's going to trend down a bit next quarter or so, just given that META is vacating 275,000 square feet at 770 Broadway.
Speaker Change: Obviously, if we complete the 770 deal, as Steve alluded to, that's going to have a significant positive impact. But in terms of near term, you know, certainly going to go to the next quarter, we have a bunch of things in the queue. You know, I think we end up the year basically where we're at, you know, now, you know, could it be 20, 30 basis points low or higher? Sure. I mean, you know,
Michael Franco: Obviously, if we complete the 770 deal, as Steve alluded to, that's going to have a significant positive impact. But in terms of the near term, you know, certainly going to go to the next quarter, we have a bunch of things in the queue. You know, I think we end up the year basically where we are now. Could it be 20, 30 basis points lower or higher? Sure. I mean, you know, it all depends on timing, right?
Michael Franco: But I think just in terms of where we end this year, I think that's a decent number and there are some things in the work that could take that number up by a couple hundred basis points, but again, it's all it's all time, but I think just in terms of the near-term next quarter, hopefully that gives you what you want.
Speaker Change: on timing, right? But I think it's just in terms of where we end this year, I think that's
Speaker Change: You know number and you know, there's some things in the work that could that could take that number up You know a couple hundred basis points, but again, it's all it's all time But I think just in terms of near-term next, you know quarter to hopefully that gives you What you what you wanted
Glen Weiss: Yeah, that's helpful. Thanks. And then just going back to, to pen to, can you give us a feel for maybe types of tenants, you know, looking at the space and from the standpoint of, you know, or are it tenants here that would be new to that submarket? Anything else you could just talk about about whether these are, you know, lease expiration driven? Did you sort of capture some market share there?
Speaker Change: Yeah, that's helpful. Thanks. And then just going back to Penn too, can you give us a feel for...
Speaker Change: You know, maybe types of tenants, you know, looking at the space and from the standpoint of...
Speaker Change: you know, or is it tenants that would be new to that sub-market, anything else you could just talk about, about whether these are, you know, lease expiration driven, where you're trying to sort of capture some market share there?
Glen Weiss: Hi, it's Glen. So as I said earlier, you know, it's a very, very good mix of all different industry sector type tenants, technology, fashion, legal, media, academia. It's a very good mix. And yet, there are new entrants to the district. And really, that's all due, you know, to the really great product that we're now delivering. And even more so, you know, the new streetscapes, all the new retail that we've embedded on the street. So it's all positive. In terms of new entrants, new types of sectors, etc., that's really the mix of the action.
Speaker Change: Hi, it's Glen. So, as I said earlier, you know, it's a very, very good mix of all different industry sector type tenants, technology, fashion.
Speaker Change: Weigel
Speaker Change: Media, academia, it's a very good mix, and yet...
Speaker Change: There are new entrants to the district.
Speaker Change: And really that's all due, you know, to the really great product that we're now delivering and even more so, you know, the new streetscapes, all the new retail that we've embedded on the streets, so it's all positive.
Speaker Change: In terms of new entrants, new types of sectors, etc., that's really the mix of the action.
Michael Franco: All right, thank you. I think one thing I would just add, Nick. I think we've talked about this before. I think it's important, right? The access to transit, which we sit on top of, is just critical, right? I mean, we are the most connected sub-market, and when you look at some of the tenants and where they are attracting their employees from, you know, that access is just critically important. So, you know, it's, you know, it's obviously what has been full historically, but now, I don't know whether you've been over to the district and seen it done.
Speaker Change: All right, thank you. I think one thing I would just add, Nick, I think when we talk about this, I think it's important, right? The access to transit, which we sit on top of, is just critical, right? And we are the most connected sub-market.
Speaker Change: and when you look at some of the tenants and where they are attracting their employees from.
Speaker Change: you know that access is just critically important so you know it's it's you know it's obviously it's what Penn's been full historically but now I don't know whether you've been over to the district and seen it done
Michael Franco: I really encourage everybody to do so, but it's a wow, and when you combine that with the transit, I think it's now, I think it's why you hear the excitement in Glen's voice, and it's why the pipeline is built so significantly.
Speaker Change: I really encourage everybody to do so, but it's a wow, and when you combine that with the transit, I think it's now, I think it's why you hear the excitement in Glen's voice, and it's why the pipeline's built so significantly.
Speaker Change: Thanks.
John Kim: Thank you. And our next question today is a follow-up from John Kim of BMO Capital Markets. Please go ahead.
Speaker Change: Thank you. And our next question today is a follow-up from John Kim of BMO Capital Markets. Please go ahead.
John Kim: Thank you. I just wanted to get back to 770 Broadway, and I understand you're under a confidentiality agreement. But just to help us understand the market dynamics and demand a little bit better, can you share what industry the tenant or user is in, whether or not it's a tech user, and if this includes expansionary space in Manhattan?
John Kim: Thank you. I just wanted to get back to 770 Broadway and understand you're under a confidentiality agreement.
John Kim: But just to help us understand the market dynamics and demands a little bit better
Speaker Change: Can you share what industry the tenant or user is in, whether or not it's a tech user, and if this includes expansionary space in Manhattan?
Unknown Executive: I'm very sorry, but we can't say anything more than we've already said.
Speaker Change #100: I'm very sorry but we can't we can't say anything more than we've already said.
Unknown Executive: Okay, but it is a lease, right? Not a sale?
Speaker Change #101: Okay, but it is a lease, right? Not a sale?
John Kim: I'd reiterate what Steve just said. I think I've said that that's all we're going to say, and I'll say that again. Thank you.
Steve Sackwell: I'd reiterate what Steve just said. I said that's all we're going to say and I'll say that again. Thank you. Sorry. That gives you a reason to tune in for the next couple of calls, John .
John Kim: I guess you have a reason to tune in for the next couple of calls, John.
Dylan Burzinski: Thank you. And our next question today comes from Dylan Burzinski with Green Street. Please go ahead.
Steve Sackwell: Thank you and our next question today comes from Dylan Burzinski with Green Street. Please go ahead.
Dylan Burzinski: Steve, I think in your prepared remarks, you mentioned potential or potential transactions to repatriate more portions of the preferred equity in the Times Square joint venture. Are you able to share any details as to what this is? Is this potential sales, other recapitalization?
Dylan Brzezinski: Steve, I think in your prepared remarks, you mentioned potential or potential transactions to repatriate more portions of the preferred equity in the Times Square joint venture. Are you able to share any details as to, you know, what this is? Is this potential sales, other recapitalizations?
Stephen Roth: Both of those are in play. So the answer is, first of all, we'll end up with about a billion and a half of preferred After the UNIGLOWs failed completely, are, if they First of all, the instrument is a dollar good, supported by very valuable collateral. Secondly, that it is a source of liquidity for us either through sales or refinancing, both of which we are in the process of working on portions of that billion and a half.
Speaker Change #102: Both of those are in play. So the answer is, first of all, that we'll end up with about a billion and a half of preferred.
Dylan Brzezinski: After the UNIQLO sale completes.
Dylan Brzezinski: are
Dylan Brzezinski: If any...
Speaker Change #103: First of all, the instrument is dollar good. It's supported by very valuable collateral. Secondly,
Speaker Change #103: That it is a source of liquidity for us either through sales or refinances, both of which we are in process of working on for portions of that billion and a half.
Stephen Roth: And then, I don't think you guys have touched on this yet, but the curious appetite for share repurchases given where the shares are today.
Speaker Change #104: And then, I don't think you guys touched on this yet, but the curious appetite for share repurchases given where the shares are today.
Speaker Change #105: There's always a question, share, repurchase, have a good day.
Stephen Roth: Well, you know, I was very excited in my teens. There is incredible value still. But in the source, with respect to our capital allocation, at the price of the shares today, that's not our primary objective. We have debt to handle, we have other capital allocation priorities.
Speaker Change #106: Well, you know, I was very excited in the teens, um, there's, there is, uh, there is
Speaker Change #107: incredible values still.
Speaker Change #108: But in the source, with respect to our capital allocation...
Speaker Change #109: At the price of the shares today, that's not our primary objective. We have debt to handle, we have other capital allocation priorities. So, as of right now, the program is dormant.
Stephen Roth: So as of right now, the program is dormant. Thank you. And our next question today comes from Brendan Lynch with Barclays. Please go ahead. Great, thank you for taking my question.
Brendan Lynch: Thank you. And our next question today comes from Brendan Lynch with Barclays. Please go ahead. Great, thank you for taking my question.
Speaker Change #109: Thank you. And our next question today comes from Brendan Lynch with Barclays. Please go ahead.
Brendan Lynch: Great, thank you for taking my question. If I recall correctly, a few quarters ago, you engaged an expanded group of brokers to pull in demand
Speaker Change #111: to the Penn District from other markets around the country. Can you discuss how that initiative is contributing to leasing year-to-date and how it's impacting the pipeline now?
Brendan Lynch: We brought in Cushman and Wakefield, you know, at the beginning of this year. They've been a very good addition to our team, certainly to strengthen, you know, our outreach, across the country, as you suggest, and in the city. So we've been very pleased with them and their addition performance hour crew.
Speaker Change #112: We brought in Cushman and Wakefield at the beginning of this year. They've been a very good add to our team. It certainly has strengthened our outreach across the country, as you suggest, and in the city. So we've been very pleased with them and their additive performance to our crew.
Speaker Change #113: Great, thank you. That was my only question.
Steve Sakwa: Thank you. And our next question comes from Steve Sakwa with Evercore ISI. Please go ahead.
Speaker Change #113: Thank you. And our next question comes from Steve Sakwa with Evercore ISI. Please go ahead.
Steve Sakwa: Yeah, thanks. Just one follow-up question.
Steve Sackwell: Yeah, thanks just one follow-up. I think last quarter you guys had talked about earnings probably bottoming in 24 And then you know moving higher in 25. I know there's a lot of moving pieces and
Steve Sakwa: I think last quarter you guys talked about earnings probably bottoming in 24 and then, you know, moving higher in 25. I know there are a lot of moving pieces and, you know, interest rates will play a big factor. Is that still the case, or is it possible that, you know, maybe with the timing of leases at 2 penns and capitalization burning off, earnings could still be down next year with more of an inflection point late in 25 into 26?
Steve Sackwell: [inaudible]
Michael Franco: You know, Steve, it's honestly, too early to give you much visibility there. I mean, I think our comments still hold, but as you can tell from UNIQLO, 770, and other things, there's a lot of moving pieces going on right now. And that's, those are the only things we've talked about. So I just think it's too early to give you that view because, based on some of those things, it may, it may impact, you know, whatever I tell you now. So I think it's, I think that's a good working assumption. And, you know, we just have to wait as we get closer to the end.
Speaker Change #115: You know, Steve, it's honestly early to give you much visibility there. I mean, I think our comments, you know, still hold, but as you can tell from the UNIQLO 770 and other things, there's a lot of moving pieces going on right now.
Speaker Change #115: and that's and those are only things we've talked about so I just think it's too preliminary to give you that view because based on some of those things that may it may impact you know whatever I tell you now so I think it's I think that's a good working assumption and you know we just have to wait as we get closer towards the end of the year
Stephen Roth: Thank you. And this concludes our question and answer session. I'd like to turn the call back over to Stephen Roth for closing remarks.
Speaker Change #115: Thank you. And this concludes our question and answer session. I'd like to turn the call back over to Stephen Roth for closing remarks.
Stephen Roth: Thank you all for participating. I think you could tell from the call, the questions. And the numbers that we published, there's a large emphasis on leasing. Leasing is very, very, very healthy in New York. And we feel that we're on the foothills of a very, very good market, and we're very excited. The Penn Project, especially, is number one on our hit parade, and if you all haven't been down there recently, you should go down, take a walk around, see what's going on, what we've done, and that'll give you a reason for why Glenn's tenant activity is increasing geometric Thanks very much.
Speaker Change #115: The call, the questions.
Speaker Change #116: and the numbers that we published, there's a large emphasis on leasing. Leasing is very, very, very healthy in New York.
Steven Roth: And we feel that we're on the foothills of a very, very good market, and we're very excited.
Speaker Change #117: The Penn Project especially is number one on our Hit Parade, and if you all haven't been down there recently, you should go down, take a walk around, see what's going on, what we've done.
Glenn: And that'll give you a reason for why Glenn's actinid activity is increasing geometrically. Thanks very much.
Operator: Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect your lines and have a wonderful day.
Speaker Change #118: Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect your lines and have a wonderful day.